Inheriting stocks & bonds
September 21, 2000: 6:24 a.m. ET

IRS law lets beneficiaries inherit assets with less capital gains hit
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - The IRS slaps you with a big capital gains bill when you sell a winning stock, but if you inherit the shares, Uncle Sam will give you a nice break that could save you thousands of dollars.

Even if you inherit stocks or bonds your father bought years ago for just a few dollars, IRS rules allow you to pay capital gains taxes from when you took ownership, not when your father originally made the purchase.

Receiving the estate

By law, you'll pay capital gains taxes of 20 percent on your profit when you sell assets you've owned longer than one year.

But under mind-numbing rules that make even tax advisers roll their eyes, inherited stocks enjoy what's called a "step-up" in basis at the time of the person's death. The cost basis of a stock is the original price the owner paid.

So let's say Dad leaves you stock that he bought years ago for $500 but is valued at $1,000 the day he dies. A few years later, when you're ready to sell, it's valued at $1,500. You'd then pay capital gains on your $500 profit.

"Our estate tax laws allow the heirs to inherit property with a new cost basis which is equal to the fair market value," said Mike Janko, executive director of the National Association of Financial and Estate Planning in Salt Lake City.

What's right for dad might not be right for you

Still, not everything you inherit will be right for your nest egg. You might find the securities are too conservative for your tastes. The step-up in basis is a "free" way to change the portfolio, said Frank Armstrong, a certified financial planner and president of Managed Account Services in Miami.

Click here to learn about the steps to take when inheriting $

"What you inherit may not be appropriate for you, but you can change that," Armstrong said. "It's a one-time free way to change the portfolio that meets your needs."

Most assets you inherit - stocks, bonds, mutual funds, property, real estate - qualify for a step-up in basis, Armstrong said. However, retirement plans, such as 401(k)s, IRAs, pension plans and even variable annuities, don't have that advantage.

"If it's a pension plan, every dollar you take out is subject to ordinary income tax because that gain has never been taxed before and the IRS wants your money," Armstrong said.

Click here to learn more about capital gains

And keep in mind that if you inherit cash - whether it's money in a bank savings account, CD or other highly liquid plan, there is no step-up in basis.

"If you inherit a checking account with $82,000, then there is no step up in basis," Janko said. Back to top

-- Staff Writer Jennifer Karchmer covers news about estate planning for Click here to send her e-mail.


Inheriting a windfall - Sept. 18, 2000

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Rules for an inherited IRA - Aug. 16, 2000

Making the most of your inheritance - July 7, 2000

All eyes on estate planning - June 27, 2000

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